Regional financial integration and its impact on banking development: Evidence from Southern African Development Community countries

Abstract The study investigated the impact of regional financial integration on banking sector development with specific focus on the impact of the Southern African Development Community protocols on trade and finance and investment. A total of 14 countries made up the study sample, and the panel cointegration fully modified ordinary least squares model (FMOLS) alongside the generalized method of moments (GMM) were used to estimate the nature of the impact. Study findings showed that regional integration through the protocol on trade had a positive and significant impact on size and efficiency of the banking sector using the FMOLS estimator. GMM estimations for the same variables were largely insignificant. Study findings also pointed to an improvement in global financial integration indicators as a result of the trade protocol, which in turn also contributed to an increase in the level of monetization of regional financial markets. The finance and investment protocol had a positive and significant impact on private sector credit for both estimators and largely insignificant relationship with broad money. The study also observed the complimentary relationship between institutional quality and social capital in the financial development process indicating the importance of policies that strengthen sound legal systems, protect property rights, and enhance the rule of law.